Economy: Monetary Policy Committee Laments Complicated Policy Environment

The Monetary Policy Committee of the Central Bank of Nigeria (CBN) has lamented that both external and domestic conditions have blended to significantly complicate the policy environment on the economy.
The Committee, which held its first statutory meeting of fiscal 2017 on 23rd and 24th January, 2017, said that over the last few weeks the pillars of the old order – free trade, multilateralism and globalization have come under intense pressure, and seemingly giving way to an era of enlightened national interest in the conduct of international economic relations.
The Committee noted that on the domestic front, the economy remains in recession and inflation pressures have yet to recede.
It said that the meeting was held against the backdrop of increased uncertainty arising from political and economic developments around the world. The Committee, whose meeting was attended by all its 10 members, reviewed the global and domestic economic and financial environments in 2016 and the outlook for the short to medium term in 2017.
It noted that the uncertainty in the external environment persisted owing to a combination of recent political and economic developments. “The key issues include: Brexit, the rising wave of populist and anti-globalization sentiments anchored by emerging bilateralism, divergent monetary policy stance of the advanced central banks and disorderly commodity price movements. With global output growth improving sluggishly, the outlook for 2017 remains unchanged owing to persisting uncertainties in commodity prices and volatility in the financial markets as well as slowing demand in the advanced economies and the emerging markets.
“The MPC welcomed the modest increase in oil prices following the last OPEC decision to cut output and noted the increase in the policy rate of the US Federal Reserve Bank in December 2016 and the potential implications of that decision for international interest rates and capital flows. While noting the materiality of the output cut on oil prices, the Committee cautioned that the effect could rapidly wane, given the likelihood of a supply glut from non-OPEC members, low level of global economic activity and weak growth. Emerging markets and developing economies, in particular, have continued to confront strong headwinds such as low commodity prices, rising inflation, currency instability, intractable low aggregate demand and subdued capital flows.
“Overall, the Committee noted that whereas improved commodity prices may provide modest tailwinds for resource-dependent economies in 2017, the medium-term outlook continues to be muffled by stagnation and uncertainty in the prospects for global trade, subdued investment and heightened policy uncertainty, especially in some major economies. Nevertheless, the IMF estimates that these constraints would decline; paving way for mild improvements in economic growth from 3.1 per cent in 2016 to 3.4 per cent in 2017.
“Global inflation commenced a moderate but steady rise on the backdrop of improvements in oil prices and currency depreciation in several emerging markets. However, amongst the major advanced economies, only the U.S Fed has commenced policy tightening[Note:1] while the Bank of Japan (BOJ), the Bank of England and the European Central Bank, all retained their accommodative policy stance at their most recent meetings.”
The committee said that data released by the National Bureau of Statistics (NBS) in November 2016 showed that the economy contracted further by 2.24 per cent in Q3 2016, having slipped into recession following another contraction in output in Q2, 2016.
“Although the overall contraction in Q3 was greater than was observed in Q1 and Q2, the non-oil sector grew by 0.03 per cent in Q3, driven mainly by agriculture, which grew by 4.54 per cent. The Committee is of the view that the key undercurrents i.e. scarcity of foreign exchange, low fiscal activity, high energy prices and the accumulation of salary arrears – cannot be directly ameliorated by monetary policy actions.”
The Committee hopes that the recent increase in oil prices would be complemented by production gains to provide the needed tailwinds to sustainable economic activity. In that regard, the Committee commends the commitment of the fiscal authorities to step up efforts to fill the aggregate demand gap through a speedy resolution of the domestic indebtedness of the federal government to states and local contractors. The Committee believes that doing so will aid the effort towards economic recovery.
The committee noted that money supply (M2) grew by 19.02 per cent in 2016, being 8.0 percentage points higher than its programmed limit. It underscored the necessity of keeping the economy adequately lubricated in the face of declining output. Growth in Net Domestic Credit (NDC) was 24.79 per cent at end-December 2016, being 17.94 per cent above its provisional benchmark for 2016.
“Likewise, growth in net credit to government, at 58.84 per cent, surpassed its programmed target of 47.4 per cent. In effect, all the major monetary aggregates exceeded their programmed provisional benchmarks for fiscal 2016.
“Headline inflation (year-on-year) continued to rise, creeping up in December 2016 to 18.55 per cent from 18.48 per cent in November, and 18.33 per cent in October, thus sustaining the upward momentum since January 2016.  The increase in headline inflation in December 2016 was driven by increase in the food component, which inched up from 17.19 per cent in November to 17.39 per cent in December. Core inflation, on the other hand, moderated slightly to 18.05 per cent in December 2016 from 18.24 per cent in November.” [myad]